Sebi cuts mutual fund fees, bats for small investors

Highlights

Sebi has cut expense ratio for open-ended equity schemes on the basis of size

TER for schemes with assets under management up to Rs 500 crore will be 2.25% every year

Funds with assets above Rs 50,000 crore will be able to charge 1.05% annually

Sebi has also barred upfront commissions to distributors

Mumbai: The Securities and Exchange Board of India (Sebi) has cut the fees that mutual funds charge investors for handling their money, modified the consent mechanism for securities market offenders and introduced rules for mandatory debt market borrowings for large companies. These, along with other measures announced by the regulator after its board meeting on Tuesday, are aimed at making it cheaper to invest in mutual funds and protecting the interests of small investors.

The capital market regulator also decided to go with the HR Khan panel recommendations, which sought the easing of restrictions the regulator had imposed on investments by non-resident Indians (NRIs) and some foreign funds. That will ease the concerns of overseas investors worried about tighter norms.

TER Cut for equity MF s Investors in equity mutual funds will benefit from the cut in total expense ratio (TER) - the fee funds collect from investors every year. Sebi has cut the expense ratio for open-ended equity schemes on the basis of size - larger funds will have to slash fees by a bigger amount.

'Savings of 1,300-1,500 cr' 10 For instance, the expense ratio for schemes with assets under management up to Rs 500 crore will be 2.25% every year. Funds with assets above Rs 50,000 crore will be able to charge 1.05% annually. The regulator also barred the mutual fund industry from doling out upfront commissions to distributors.

The cut in total expense ratio could lead to investor savings of Rs 1,300-1,500 crore, said whole-time member Madhabi Puri Buch at a press conference after the board meeting.

"We are glad that upfront payouts will stop and the industry will move to a full trail model of payment, which is the right way to compensate distributors. Mutual fund is becoming a pull product which is favourable," said Swarup Mohanty, CEO, Mirae Asset Mutual Fund. "Though profitability will come down in the near term, it will be compensated by higher volumes in the coming days."

ET had reported on Monday that Sebi plans to cut the total expense ratio and bar upfront commissions.

Consent MechanismSebi said it will not settle offences through the consent mechanism if it views the issue as having market-wide impact, affects the integrity of the market or results in loss to investors. The consent order mechanism is similar to a negotiated settlement of civil proceedings between the regulator and securities law offenders and aimed at reducing long-drawn litigation.

"It will be a principle-based approach and not a straitjacketed approach," said Sebi chairman Ajay Tyagi.

KYC requirement and common application form for FPIsThe regulator said it agreed with the Khan committee recommendations and will issue a separate circular on the matter. On April 10, Sebi had issued a circular that barred NRIs and persons of Indian origin from being beneficial owners in funds that invest in India. Foreign portfolio investors (FPIs) opposed the move, saying Sebi should use the beneficial owner definition for greater disclosures and not to curb investments.

After an FPI lobby group openly criticised the regulator last week, the committee came out with a fresh set of recommendations. The committee suggested NRIs should be allowed to manage funds and relaxed rules that would have limited their investments in the country.

Sebi also finalised a common application form for FPI registration including Permanent Account Number (PAN) and Know Your Customer (KYC) fields for opening bank and demat accounts. The move is part of efforts by the government and regulators to ease the conduct of business in India.

Reducing Timeline for ListingThe regulator said it will cut down the listing period after an initial public offering (IPO) to T+3 from T+6 now. This means a company will get to list three days after the IPO as against six at present.

"The board has, in principle, approved the proposal of revisiting the public issue process by way of introducing the use of Unified Payment Interface (UPI) with facility of blocking the funds (ASBA facility), as a new payment mechanism for retail investor applications submitted through intermediaries," Sebi said in a release.

Under Applications Supported by Blocked Amount, or ASBA, money isn't debited until shares are allotted.

Bond market borrowing by large corporatesSebi also approved operationalisation of the budget announcement that mandated large corporates to meet one-fourth of their financing needs through debt instruments. The regulator said the rules will come into effect from April 1, 2019. A large corporate has been categorised as one with outstanding borrowings of Rs 100 crore or above and credit rating of AA and above.

Foreign investor participation in commoditiesThe regulator approved rules for permitting foreign entities to have exposure to Indian commodity markets. Such entities would be classified as "eligible foreign entities."

Reclassification of promoter / publicSebi changed rules for reclassification of promoters. Promoters seeking reclassification and persons related to them should not hold more than 10% of the total voting power or exercise control over the listed entity or have special rights in the company, the regulator said. They should not be in key managerial positions for three years from reclassification and be willful defaulters.

Restrictions on Fugitive Economic OffendersThe regulator said there will be restrictions on fund raising through various share sales or making an open offer for Fugitive Economic Offenders.

With regard to the expense ratio changes, there will be no benefit to investors up to assets under management (AUM) of Rs 2,000 crore. From Rs 2,000 crore to Rs 5,000 crore, they gain 10 basis points, from Rs 5,000 crore to Rs 10,000 crore they gain 17 basis points, from Rs 10,000 crore to Rs 20,000 crore they gain 25 basis points and above Rs 50,000 crore they gain 40 basis points. A basis point is 0.01 percentage point.

"Benefits of large scale will be passed on to investors. Paying brokerage via the trail route is a healthy practice and will ensure discipline," said Radhika Gupta, CEO, Edelweiss Mutual Fund.

Income for distributors may decline by as much as 25%, said Amol Joshi, founder, Plan Rupee, a Mumbai-based distributor.

"It will be unviable for distributors to service small investors and there is risk of mutual funds becoming an elite product," he said. "The regulator could have adopted a consultative process as the industry body AMFI (Association of Mutual Funds of India) believed there was no scope to reduce expense."